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When considering the risk of investing in a stock, it’s important to evaluate the company’s debt levels. Excessive debt can pose a significant risk to a company’s financial stability. Cellnex Telecom, S.A. (BME:CLNX), like many other companies, utilizes debt as part of its financing strategy. The key question, however, is how much risk does this debt create?

Debt becomes risky for a business when it is unable to meet its obligations, either through generating sufficient free cash flow or raising capital at a reasonable price. In the worst-case scenario, if a company is unable to fulfill its debt repayment obligations, shareholders may end up with nothing. A more common scenario is that the company is forced to raise new equity capital at a low price, which can dilute the value of existing shares. While debt can provide cheap capital and allow for reinvestment at high rates of return, it also carries these risks.

Looking at Cellnex Telecom’s debt levels, it had €18.1 billion of debt at the end of June 2023, up from €16.6 billion a year ago. The company’s net debt is approximately equal to its total debt since it doesn’t have much cash on hand. With €3.03 billion due within 12 months and €26.0 billion due beyond 12 months, the company’s liabilities outweigh its cash and receivables by €27.6 billion. This deficit exceeds the company’s market capitalization of €25.0 billion, indicating that investors should closely monitor Cellnex Telecom’s debt levels.

Analyzing debt levels relative to earnings provides further insight into the company’s financial health. Cellnex Telecom has a high net debt to earnings before interest, tax, depreciation, and amortization (EBITDA) ratio of 8.0, indicating a substantial debt burden. Additionally, its interest coverage is weak, with EBIT being only 0.41 times the interest expense. Although the company experienced a significant increase in EBIT in the past year, it still faces considerable risks due to its debt levels.

While examining the balance sheet is crucial for understanding a company’s debt, it is also essential to consider future earnings and free cash flow. Cellnex Telecom has had negative free cash flow in the past three years, which increases the risk associated with its debt. Investors should be wary of these factors and keep a close eye on the company’s liquidity.

In conclusion, Cellnex Telecom’s debt levels indicate a significant risk to its financial stability. It’s important for shareholders to carefully monitor the company’s debt management and liquidity. Ultimately, considering both the balance sheet and other risks beyond debt is crucial when evaluating an investment opportunity.

Note: This article has been rewritten and formatted without author information, contact information, sources of information, and quotes while retaining the original facts.

The post Understanding the Risk of Debt: A Closer Look at Cellnex Telecom appeared first on ISP Today.